ECO 2023 Principles of Microeconomics - Unit 2

Firm

a business organization or company that produces outputs using resources/inputs

Short run

period of time in which some inputs are fixed

Long run

period of time in which all inputs are variable

Variable

easy to change or alter

Total product

amount of quantity produced

Marginal product

the change in output divided by change of an input (i.e. labor or capital)

Average product

overall product divided by overall input

The law of diminishing returns

phenomenon where as more of a variable input is applied in the short run, marginal product will eventually fall

Explicit costs

costs you took action to pay, obvious and visible (also referred to as accounting costs)

Implicit costs

costs you incur from not doing the next best thing, such as profits forgone (also called opportunity costs)

Economic costs

the sum of explicit and implicit costs

Fixed costs

costs that remain constant in the short run

Variable costs

costs that change with output; directly related to output production

Sunk costs

costs that have already been incurred and cannot be recovered, so they do not matter

Average costs

Total costs, fixed costs, or variable costs divided by quantity produced

Marginal cost

the quotient of change in total fixed OR variable costs divided by the change in quantity produced

Economies of scale

using more fixed inputs makes costs FALL

Diseconomies of scale

using more fixed inputs makes costs RISE

Revenue

money firms earn from sales

Total revenue

the product of the price times the quantity of a good

Profit

money gained when firms are paid more for something than it cost to make, get, or do it

Profit formula

total revenue minus total costs

Perfect competition

a market extreme in which there are many firms, low barriers to entry, standardized goods, and firms are price takers

Price takers

firms that cannot alter the market price, they just have to take it and roll with it

Profit-maximizing value

where MC=MR

Marginal revenue

the change in total revenue divided by the change in quantity

The shutdown rule

if a firm gets enough revenue to cover their variable costs, they should continue to produce until they can get rid of their fixed inputs and exit the market